5-911544
Dear Sirs:
Re: RCA's Earmarking and Guarantees
We are writing in reply to your letter of May 31, 1991, concerning retirement compensation arrangements (RCA's) and various methods of funding them, in particular, "earmarking" and "guarantees". You ask us to explain the Department's position on respecting this matter.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Whether an RCA is created as contemplated by subsection 248(1) of the Income Tax Act (the "Act") is a matter of fact which can only be ascertained by looking at all the circumstances. The fact situations which you have described in your letter are not detailed enough to permit us to predict the Department's position should we be asked to comment on particular transactions which fall within such general categories of funding arrangements.
In order to be an RCA, a plan or arrangement must provide for a "contribution" by an employer. In the case of a life insurance policy acquired by the employer to fund benefits, subsection 207.6(2) of the Act deems an RCA to exist.
With respect to arrangements other than those involving life insurance policies, although we have not taken a general position that can be applied in all circumstances, it appears to us that it is reasonable to consider an arrangement to be funded if any assets of the employer have been set apart from the employer's assets that are available for the general creditors of the employer.
Certainly the pledging of property as security for the plan, letters of credit, mortgages or asset-backed bank guarantees would all constitute funding and cause the plan to become an RCA. It is also possible that simply setting aside assets (e.g. a second bank account) could constitute funding if the employee is identified with that asset (e.g. bank account #... - retirement fund for employee X), since such an action may create a trust (custodian)type of arrangement.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate